There are likely weeks and months of thorny negotiations still ahead for the U.S., Iran and other parties, but a revival of the 2015 nuclear deal -- and the easing of sanctions -- could see Tehran ramp up oil production very quickly.
Just how quick?
"Once Iran returns to nuclear compliance -- assumed to be two months after a return to the deal is agreed -- it will try to export as much oil as it can as fast as it can. It will not be subject to OPEC+ quotas and will instead fight to regain its market share," said Henry Rome, senior analyst for global macro at Eurasia Group, in a Thursday note.
He offered a pair of charts (see below) that indicate Iran could hit its 3.8 million barrel-a-day capacity within 12 months of reaching a deal:
Iran, of course, wouldn't be exporting all of that crude. Rome estimated new exports would likely top out at around 2.2 million to 2.4 million barrels a day. Total exports, including sales out of the country's significant volumes of floating storage, could run as high as 2.7 million barrels a day over the next year, he said.
Within three months of achieving compliance, Iran's exports would likely rise by 700,000 barrels a day, with around 70 million barrels of floating storage offloaded in the three to six months after a deal. Production would hit 3.2 million to 3.5 million barrels a day in the first three months, while closing the gap between those levels and maximum capacity at 3.8 million barrels a day would likely take another six to nine months, Rome estimated.
The U.S. and Iran have floated proposals for an interim agreement before June, which would buy time for talks on a full agreement in the fall, Rome noted. While it's possible that an interim arrangement could allow for small volumes of Iranian oil on to the market legally, it's not likely as it would be too big of a concession for the U.S. to stomach, he said.
The Wall Street Journal on Wednesday reported that the Biden administration signaled that it would be open to easing sanctions against elements of Iran's economy, including oil and finance, helping narrow differences in the nuclear talks.
The current level of Iranian exports is unclear, with the country likely exporting between 700,000 and 1 million barrels a day, mostly through clandestine shipments to China, Rome noted.
Brent and West Texas Intermediate crude futures both eked out small gains Thursday. Both benchmarks have rallied around 27% so far in 2021, boosted in part by efforts by the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, to curb output as they await a fuller recovery in demand -- a recovery that's been threatened by a resurgence in COVID-19 cases outside the U.S.
Meanwhile, a return to Iranian production would intuitively be a negative for prices, particularly if demand growth remains weak due to continued restrictions on international travel that are likely to spill into 2022, accompanied by an accelerating transition to green energy, Rome said.
"Unless consumption makes an unexpected and sharp recovery, OPEC+ will still need to manage the market," he said, referring to the Organization of the Petroleum Exporting Countries and its allies. "Outside OPEC, a full return of Iranian oil to markets will make it more difficult for producers to attract investment into maintaining and expanding production."